Commodity Calls

Demystifying a commodity – Aluminium

Seetharaman R | Updated on January 12, 2018 Published on May 28, 2017


PO29_aluminium (2)

Aluminium, one of the widely used metals, has varied usage in the transportation, construction, electrical and packaging industries. China produces and consumes more than 50 per cent of the global production — which is in excess of 60 million tonnes per annum.

The other major producers and consumers include North America, Russia, India and some European nations. For traders in the commodity market, the futures contract on the Multi Commodity Exchange is an instrument available for trading. The MCX futures contract can also be used by businesses to hedge against volatile price fluctuations in the metal.

Aluminium futures

The MCX-Aluminium contract is traded under two categories — Aluminium and Aluminium Mini.

In Aluminium futures, the minimum trade size, that is one lot, is 5 tonnes (5,000 kg) while in Aluminium Mini contracts, one lot is equal to 1 tonne (1,000 kg). However, in both cases, the quotation value, that is the value at which prices are quoted on the terminal, is one kilogram. So, if the current market price is ₹125 per kg, one lot of Aluminium contract will cost ₹6.25 lakh (125*5,000) and one lot of Aluminium Mini contract will cost ₹1.25 lakh (125*1,000).

However, traders or hedgers need not pay this entire amount upfront. Rather, a small margin amount is sufficient. This margin amount, in general, would be 4 to 5 per cent of the cost. Say, if the margin is 5 per cent, then ₹31,250 (5 per cent of ₹6.25 lakh) and ₹6,250 is required to buy one lot of Aluminium and Aluminium mini contract, respectively.

The margin requirement will vary every day and could also be much higher in extreme volatile conditions. Besides margin, you are also charged a brokerage fee, stamp duty, commodity transaction tax, service tax and other charges. These charges account for about 0.01 to 0.02 per cent of the contract cost. Settlement can be done either in cash or through physical delivery. However, predominantly, this contract is closed through cash settlement.

Price movers

There are various factors that influence the price movement of the MCX contract. Traders and hedgers will have to keep abreast of these factors in order to forecast or gauge where aluminium prices are headed. The first and foremost factor to get the price outlook from a long-term perspective is the international demand and supply situation. For instance, China is the world’s largest consumer, accounting for more than 50 per cent of the global aluminium consumption. So the demand from China will have a strong influence on aluminium price. That is, if Chinese demand is going to increase sharply, then aluminium prices are likely to increase and vice-versa.

The domestic contract moves in tandem with the aluminium traded on the London Metal Exchange (LME). So if you are a trader, keeping an eye on the LME prices will help you understand where MCX prices are headed. In addition to this, the movement in the dollar-rupee will also influence MCX prices.

With inputs from Hareesh V, Head of Research, Geofin Comtrade

Published on May 28, 2017
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